Analysis: Rail freight sector must bide its time for a clear strategy

How is our new government faring on rail reform? In the build-up to the General Election (RAIL 1012), we consulted closely with the industry to devise a seven-point manifesto to create a sound base for Britain’s railways. In this issue, Howard Johnston assesses progress on freight.

Our Manifesto for rail:

1. Get on with GBR without further delay
2. Secure permanent cross-party consensus
3. Draw up a 20-year plan and stick to it
4. Devolve decision making to London and the regions
5. Remove the bottlenecks and reopen lines
6. Sort out the fares mess
7. A fair deal for freight

Governments rely on being popular for their survival, and it’s the sad truth that the UK’s rail freight business is never going to be a vote winner or loser.

It is therefore not a top priority for Labour in its opening months in power.

Its strategy for rail, published earlier this year, was heavily slanted towards a better deal for the passenger, although the current National Rail Plan does aim to increase the share of freight traffic by rail from 27% to 45% by 2030.

There’s a lot of detail missing, but Network Rail has forecast major growth in demand in England and Wales between now and 2028-29, while at the same time admitting that wholesale creation of extra route capacity is not justified because many existing train paths are not being used.

Private freight companies know they have to fend for themselves. DB Cargo, whose market share has fallen from 90% since privatisation to just 27% now, has been upfront with its customers about its £90 million loss last year (half of which was for restructuring).

DBC has suffered badly from the near-total collapse of its traditional coal, mail and parcels, and charter segments, while watching new competition nibble away at its construction and Network Rail maintenance business.

Intermodal (container) traffic, the big growth area, has been a huge success for Freightliner and GB Railfreight.

Rail Freight Group Director General Maggie Simpson is positive. She says she is gratified that the government wants to maintain the narrative, even though increasing network capacity may be take longer than was recently hoped.

Enhancements? Simpson says: “It’s too early to tell, but the dialogue with the Department for Transport is continuing, and we shall doubtless learn in due course what the priorities are.”

The former Conservative government had strengthened the case for rail freight, and new Transport Secretary Heidi Alexander may have to reveal her hand after the all-embracing National Spending Review.

It had been hoped that the Chancellor’s October 30 Budget might have discussed speeding up the switch to rail, which is key to meeting environmental objectives. But it didn’t.

The Budget did cap fuel charges (unchanged for 13 years) to help the beleaguered road haulage industry. A decline in volume since COVID-19 has resulted in lorry firms going out of business at an unprecedented rate, plagued by a shortage of drivers and by aggressive inward competition that has driven down prices to unprofitable levels.

This all mirrors the national economy, where consumer demand is flat because of inflation, a sharp increase in the prices of mortgages, and much more.

It’s not all gloom, however. Rail freight interchange terminals continue to be planned and built in some numbers, and the Transpennine Route Upgrade is a massive benefit.

Elimination of the Ely bottleneck is back on the agenda, as is limited gauge enhancement, and the smoothing out of small but acute pinch points. Extra capacity will also be created on the current West Coast Main Line by HS2.

Rail freight companies believe they should receive more government support, and the frustration of DB Chief Executive Andrea Rossi boiled over in the summer when Royal Mail said there was no going back on its decision to end its bespoke rail service.

The debacle clearly demonstrated how differently the government views the passenger and freight sectors.

Driven by its manifesto which declared that passengers come first, Labour says the early termination of domestic franchises is a key priority. It could not easily intervene with freight, which is a world business. Nor does it want to.

Royal Mail is almost a side issue, because it racked up a £419m loss last year, and will soon be off the books when a Czech businessman takes it over.

As its rail operation had slumped to 3% of its turnover when it ended, pleas by DB Cargo’s Rossi for state intervention would inevitably fall on deaf ears.

Two of the other major UK freight hauliers - Freightliner and GB Railfreight - can only take heart from Labour’s April 2024 manifesto Getting Britain Moving, which placed a duty on Great British Railways “to enable the growth of rail freight alongside passenger services, setting clear and meaningful targets for rail freight growth within pre-defined periods”. However, that could be some way off.

Shifting fortunes

The fortunes of DB Cargo have been in the spotlight recently. When it came into existence as Wisconsin Central (WC - renamed English, Welsh and Scottish Railway) over 30 years ago, it paid just £225 million for most of the UK freight business, which included 900 locomotives and 19,000 wagons. It later added the Rail Express Systems (Res) mail and commodities business.

EWS Chairman Ed Burkhardt had such confidence that he invested in 250 new Class 66 locomotives and 30 Class 67s to supplement other stock (Class 56s, ‘58s’, and ‘60s’), which it intended to keep running.

Since then, a lack of work has resulted in many of the new engines being moved on to other UK operators and overseas, or simply laid up.

All the older types have gone, and parts of Toton depot resemble a scrapyard, with long lines of semi-derelict examples suggesting that it has failed to attract interest through its sales tender lists.

Burkhardt declared that he could double his business in the ten years up to 2006, but the best he did was 68%. He was scuppered by the success of competition, and finally by a corporate management decision to ditch growth in favour of chasing immediate profit.

EWS’s Railfreight Distribution (RfD), which ran trainload and container services through the Channel Tunnel, lost out to new entrants.

Res lost its way, as did ‘king coal’. Deep mines supplied over 80 million tonnes to power stations in the mid-1980s.

Meanwhile, although Freightliner has a high volume of business, there is little profit to show for it. It will be recalled that it entered the private sector as a management buyout for a giveaway £5m, plus £75m in free track access vouchers.

Freightliner also took an early battering from the loss of its coal traffic, although it has enjoyed great success with heavy haul and deep sea containers.

Talk of Growth

The government’s grand plan is to boost the switch to rail by 75% in 2050. Is this realistic, or a political pipedream?

The importance of intermodal (container) traffic is pivotal. According to Office of Rail and Road figures for January-March 2024, the 7.78 million freight train kilometres travelled were 6% lower than the corresponding three-month period in 2023, and the lowest since figures began in April 2010 (apart from the pandemic).

At 31.6%, Freightliner Group has the biggest share of the total UK business (30.9% in 2023), GBRf is second with 29.5%, and DB Cargo third with 27.1%. To complete the picture, Direct Rail Services has 7.3%, Colas Rail 3.7%, and Devon & Cornwall Railways (DCR) 0.8%.

Overall, rail freight is nowhere near the money-spinner it once was, as the latest profits from some of the major businesses reveal. Successive governments have sat back and watched this all happen.

To compare the present day with pre-privatisation, it seems remarkable that British Rail’s Trainload Freight raked in a £100m-plus surplus on a turnover of £500m back in 1992.

Little profit is being declared

The latest financial statements from Freightliner Group and GB Railfreight, registered with Companies House, show how precarious it is currently to be a UK freight operator.

Declared profit margins are so low as to be unattractive to world investors, unless the government puts its faith behind them. DB Cargo’s accounts are not published, but its self-confessed £90m loss last year is alarming.

Freightliner Group’s figures are also not transparent, because it has just pulled away from US-owned Genesee & Wyoming to look after itself.

However, its company statement says that it has negotiated a £50m borrowing facility until 2029, should the need arise. At the same time, it insists that it is a going concern even if business drops by as much as a third.

In the 12 months ending December 31 2023, Freightliner Group announced a profit of £1.7m on a turnover of £32.7m, a margin of 5.2%. Business was 11.3% up from the previous year’s £28.9m, when a loss of £8.9m was recorded.

GBRf’s figures for the year to December 31 2022 (the latest published) show a profit of £7.4m on a turnover of £270m (2.7%), compared with a surplus of £3.1m on £228m in 2021 (1.4%).

While the margins may seem low, GBRf is investing heavily in new buildings and leasing additional rolling stock.